Year-over-year first-quarter activity reminds me of the 1993 movie “Groundhog Day,” in which the same activity keeps happening over and over again. On the other hand, the difference in January activity versus March reminds me of an old-fashioned rollercoaster—up one month and down the next.
Deal activity in the first quarter bested last year’s by three deals: 54 transactions versus 51. But March activity was only half of January’s: 12 versus 24. Keep in mind that deals closing now were hatched several months ago, back in 2009, when not a lot of deal talk was taking place.
Insurance brokerages dominated the quarter acquiring 49 firms, or 91%, the greatest percentage in the past 12 quarters. Arthur J. Gallagher led the way with five deals, and Brown & Brown was right behind with four. Deal activity for both brokerages picked up in the first quarter of this year versus last, but it didn’t compare to the record pace set in 1Q 2008. While most of the usual suspects got on the scoreboard this quarter, two of the most active acquirers in 2009, Hub International and Ascension Insurance, were silent. The rest of the activity was driven by a combination of methodically acquisitive brokerages and by brokerages both large and small doing a deal for the first time, or for the first time in years.
The biggest brokerage transaction of the quarter came in March when Marsh & McLennan Agency (MMA) announced the acquisition of Thomas Rutherfoord in Roanoke, Va. This created the foundation of MMA’s Mid-Atlantic region. Rutherfoord was a top-50 brokerage, the second to be picked off by MMA in four months. Since November 2009, MMA has acquired foundational agencies in four different geographic regions, amassing roughly $170 million in revenue.
From a bank perspective, the line in the sand has been drawn. Those few national and several regional and local banks that have made a commitment to insurance distribution will continue to strategically acquire and build out their brokerage operations. Ironically, neither Wells Fargo nor BB&T consummated a transaction in the first quarter. That stat will change in the months ahead.
Joining the ranks of the inactive are insurers and “others.” There have been no insurance company transactions since January, when two companies acquired two wholesale agencies with underwriting capabilities—a move that makes great financial and strategic sense and is something we’ll see more of.
Despite the lingering uncertainty surrounding healthcare reform throughout most of the first quarter, the benefits category saw some action, accounting for about 28% of deals. Even with the passage of reform legislation, most buyers’ opinions have not changed. Benefits firms will be acquired but with caution and scrutiny. Firms catering to the small-group market will receive the most scrutiny and perhaps no attention at all. It will take time for both buyers and sellers to get their arms around what the legislation means for their business.
The overwhelming consensus among industry M&A participants is that pipelines are full and there should be more deal activity this year than last. The valuation gap between buyers and sellers has narrowed, but some still can’t see the forest for the trees, especially in the forthcoming higher capital gains rate environment. Without the cyclicality and psychological effects of a hard market, the impending rise in capital gains rates, and passage of healthcare reform, consolidation just may be the key to survival.